BlackRock Capital Investment Corp (BKCC) 2012 Q1 法說會逐字稿

Good afternoon. My name is Christian, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Kelso Capital Corporation's investor teleconference.

Our hosts for today's call will be Chairman and Chief Executive Officer, James R. Maher; Chief Operating Officer, Michael B. Lazar; Chief Financial Officer, Corinne Pankovcin, and Secretary of the company and general counsel of the advisor, Lawrence D. Paredes.

(Operator instructions)

Mr. Maher, you may now begin your conference.

Welcome to our first quarter conference call. Before we begin, Larry will review conference call information.

Thank you, Jim. Before we begin our remarks today, I would like to point out that certain comments made during the course of this conference call and within corresponding documents contain forward-looking statements subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions.

We call your attention to the fact that BlackRock Kelso Capital Corporation's actual results may differ from these statements. As you know, BlackRock Kelso Capital Corporation has filed with the SEC reports which list some of the factors which may cause BlackRock Kelso Capital Corporation's results to differ materially from these statements.

BlackRock Kelso Capital Corporation assumes no duty to and does not undertake to update any forward-looking statements. Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified.

Accordingly, BlackRock Kelso Capital Corporation makes no representation or warranty with respect to such information. Please note that we have posted to our website an investor presentation that complements this call.

Shortly, Jim and Mike will highlight some of the information contained in the presentation. At this time, we would like to invite participants to access the presentation by going to our website at www.blackrockkelso.com and clicking the May 2012 investor presentation link in the presentation's section of the Investor Relations page.

With that, I would now like to turn the call back over to Jim.

Thank you, Larry. Good afternoon, and thank you for joining our call today. We're pleased to report that we had a busy and productive first quarter, following what was a solid year for BlackRock Kelso Capital. In the quarter, we made new investments aggregating $73 million. On a net basis, the portfolio grew by more than $30 million.

Total investments at their current fair market value were $1.095 billion at March 31, 2012, compared to $1.049 billion at December 31, 2011 and $921 million at the end of the first quarter last year.

Our leverage stands at 0.54 times at first quarter end. Funds to increase our investment portfolio were provided by additional borrowings under our revolving credit facility.

Consistent with 2011, net portfolio growth remains one of our primary areas of focus. We remain under leveraged and have capital available under our bank credit facility to support our near-term growth goals.

We remain pleased with our investment opportunities. Our strong relationships with private equity firms, commercial banking firms, investment banks and management teams provide us with substantial deal flow.

We currently have sufficient debt capacity. Net debt as of March 31 was equal to $374 million, relative to the $1.1 billion fair market value. At quarter end, we had $171 million available under our existing revolving credit facility and $322 million of statutory availability under the BDC leverage rules.

Our balance sheet remains under leveraged, affording us the opportunity to raise net investment income without raising additional equity capital. Over the next several quarters, we expect that we will be able to continue to grow assets using currently available loan facilities for new investments.

Our desire to grow our portfolio continues to be tempered by prudence and restraint, investing only in transactions with appropriate risk adjusted returns. Market conditions remain somewhat volatile, dominated by macro factors and general economic conditions.

Frequent changes in market liquidity have further reinforced our strategy of remaining conservatively positioned. We continue to focus our attention on dividend coverage. For the quarter, we had adjusted net investment income of $0.25 a share, adjusted for pro forma incentive fees, slightly behind our fourth quarter adjusted results of $0.27 per share and in line with our expectations.

Yesterday, our Board of Directors declared a regular dividend of $0.26 per share, payable on July 30, 2012 to stockholders of record at the close of business on June 19, 2012.

For the last 12 months, net investment income totaled $1.05 per share, which has exceeded our dividends of $1.04 per share. Since adjusting our dividend to $0.26 per share, net investment income has exceeded dividend payments by approximately a penny a share. We remain confident that we will be able to continue to earn our dividend.

So far, the second quarter is off to a solid start. Consistent with what we have observed over the last several quarters, the domestic economy remains steady with each quarter showing slight improvement, particularly for middle market companies. As was the case at the end of 2011, we expect macro headwinds will continue to persist in the global markets.

We are optimistic that deal flow will continue to increase, surpassing the activity levels of 2011. The investment environment remains (technical difficulty) optimistic, as this tends to benefit BlackRock Kelso Capital. Relationship transactions and income incumbency continue to deliver greater value to our transaction partners than in overheated and liquid debt markets.

Mike will now discuss our portfolio activity and market conditions in more detail.

Thank you, Jim. Good afternoon and thanks for joining our call today. I'm pleased to have the opportunity to talk about some of our financial results and discuss how market conditions affect our portfolio strategy.

In advance of this conference call, we posted to our website our quarterly investor presentation. For those who have access to our website, the financial section of our presentation starts on page 9. Before moving into our comments about our first quarter financial performance, I would like to mention a few slight but, we believe, important improvements in our financial statement presentation.

Principal among these changes, we separated out the components of our revenue into interest, dividend, fee and other income on our consolidated statement of operations to help readers compare these income components from period to period.

In addition, we've added some footnote disclosure and improved the presentation of our schedule of investments to increase readability and comparability from period to period.

With respect to the quarterly operating details, total investment income was $33.2 million for the first quarter, compared with $36 million for the quarter ended December 31. Net investment income totaled $0.26 per share, compared with $0.15 per share in the fourth quarter of 2011. Had our incentive fees been accrued ratably throughout the year, rather than heavily weighted to the fourth quarter as required under GAAP, our net investment income would have been $0.27 in the fourth quarter of 2011 (technical difficulty) $0.25 for the first quarter of 2012 as adjusted.

Adjusted to remove the effects of capital structuring fees, consent fees and prepayment fees in each quarter, our investment income for the first quarter was $29.7 million, relative to $30.5 million in the fourth quarter of 2011 and $28.1 million in the third quarter of 2011.

Fee income in the first quarter equaled $3.5 million and included fees related to new investments, prepayment fees, and other prepayment income and amendment fees as well as commitment fees. Fees earned in the fourth quarter of 2011 equaled $5.5 million.

Total expenses for the first quarter were $14.2 million versus $24.7 million for the prior quarter. Of these totals, for the quarter ended 12/31, 2011, $11.9 million of incentive management fees were incurred, versus $2.2 million for the first quarter of 2012.

(Technical difficulty) fees were $5.3 million for the fourth quarter of 2011, compared with $5.4 million for the quarter ended March 31, 2012. On a pro forma basis, incentive management fees for the first quarter were $2.6 million, versus $3.5 million for the prior quarter as adjusted.

In total, we invested $73.4 million during the first quarter. We made two new portfolio company investments which totaled $40 million of par value. Our new portfolio company investments in the quarter consisted of a senior secured loan and a first lien senior secured note. We continue to believe that in aggressive and volatile market conditions, a focus on senior secured position and portfolio companies remains the most prudent use of our capital.

In addition, we made an investment in new financings for three existing portfolio companies equal to $25.6 million, as well as several investments across existing portfolio companies.

Investments in new portfolio companies during the first quarter of 2012 included $30 million in the first lien senior secured note of BPA Laboratories and $10 million in the senior secured second lien loan of Road Infrastructure Investment LLC.

The senior second lien loan to Road Infrastructure was made at a floating rate, contains a Libor floor as well as call protection. The first lien senior secured note to BPA Labs was issued at a fixed rate. Each of these new investments was issued with an original issue discount to par. All in, our expected yield to worst in these securities is 10.7% and 13.25% respectively.

In addition, during the first quarter, we made an additional investment in Ashton Woods. As part of this transaction, our exposure increased from $37.5 million in the prior loan to $52.5 million in the current loan facility. We also added $5.6 million in an upsizing of the subordinated debt investment in A&A Manufacturing and $5 million in an increase in the subordinated debt of the Pay-O-Matic Corporation.

BlackRock Kelso Capital earned amendment, structuring, commitment and other fees in conjunction with each of these new financings and made investments in new portfolio companies with purchase discounts.

During the first quarter, we also added $12.3 million in par amount to our investment in the second lien term loan for AGY Holding Corporation. Investments in AGY and other existing securities of existing portfolio companies were generally a series of opportunistic secondary market purchases at significant discounts to par.

At the end of the first quarter, approximately 80% of the investments in our portfolio were in transactions where we played a sole or shared lead role in the structuring of the securities. And the weighted average yields of the debt and income-producing equity securities in our portfolio at their current cost basis were 11.6% at March 31, 2012. This corresponds with a weighted average yield at fair value of 12.3% at March 31, 2012.

As we have worked to position the portfolio for the current economic environment, the percentage of our portfolio comprised of senior loans and notes has remained somewhat stable at 72% today, compared to 73% at the end of 2011.

At the end of the first quarter, the balance of our portfolio was 16% invested in unsecured or subordinated debt, 11% in equity investments and 1% in cash and cash equivalents.

Jim mentioned strengthening domestic economic conditions. This serves as a positive backdrop for our portfolio companies. We continue to be pleased with their overall performance. Non-accruals remain low. Currently, 0.4% of our total portfolio at fair market value is held in non-accrual. This corresponds with 0.8% of our total portfolio on a cost basis.

The weighted average rating of our portfolio companies at March 31 was 1.19. This is relatively stable with year-end as the improvement in economic conditions generally during 2011 and into 2012 as well as the credit accretive effects of some portfolio rotation into a higher (technical difficulty) of credits that were structured post-credit crisis continued into the first quarter of 2012.

First quarter of 2012 saw a slight increase in portfolio company valuations to 95.8% of cost from 95.5% of cost at the end of 2011.

So far in the second quarter to date, we have experienced portfolio repayments which have totaled approximately $23.5 million. This includes the repayment of our senior secured second lien term loan to Physiotherapy Associates.

This repayment trend is expected to continue in the remainder of the second quarter, as we have identified at least one additional asset we expect will prepay prior to June 30th. We generally view early prepayment of our investments as a positive, as we typically receive fees or penalties in conjunction with these events.

Given our current investment pipeline, our expectation is for a relatively flat quarter overall for net investment.

I would now like to turn over the call to Corinne to review some of the GAAP financial information for the first quarter.

Thanks, Mike, and hello, everyone. I will now take a few moments to review some of the details of our first quarter 2012 financial information. In comparing the first quarter 2012 with the first quarter of 2011, our total investment income increased approximately $8 million to $33.2 million or $0.45 per share.

The increase in investment income for the three months ended (technical difficulty) 2012 is primarily attributable to higher average rates and fees on an overall larger average portfolio during the quarter.

Fee income earned during the first quarter was $3.5 million. Net investment income totaled $19 million net of incentive management fees earned of $2.2 million during Q1 2012. NII per share was $0.26 for the three months ended March 31, 2012, as compared to $0.20 for the three months ended March 31, 2011.

The increase for 2012 period is primarily a result of an increase in interest income and other fees, partially offset by an increase in interest and credit facility related expenses.

At March 31, 2012, we were in compliance with regulatory coverage requirements with an asset coverage ratio of 284% and were in compliance with all financial covenants under our debt agreement. We did not purchase any shares of our common stock during the three months ended March 31, 2012.

During the first quarter of 2012, BlackRock Kelso Capital had net appreciation on our portfolio investments of approximately $1.6 million. On a per share basis, net asset value was $9.59 per share at March 31, 2012, up slightly from $9.58 per share at year end 2011.

The increase in $0.01 per share was primarily due to higher net investment income, offset by recognition of incentive management fees for the quarter.

With that, I would like to turn the call back to Jim.

Thanks, Corinne. We're pleased with our quarterly and year-to-date performance. As we look into the remainder of 2012, we remain optimistic about our current position. We continue to build on a higher interest income run rate than we had in 2011, and we expect to continue to increase it through the year.

We remain focused on continued prudent portfolio growth while focusing on preservation of capital. As the broader debt markets strengthen, we remain disciplined in seeking outside returns without taking any inappropriate risks. Overall, our pipeline of opportunities remains solid.

On behalf of Mike, Corinne, Larry and myself, I'd like to take this opportunity to thank our investment team for all of their efforts and to thank you for your time and attention today.

Operator, would you now please open the call for questions?

Certainly. (Operator instructions). Our first question comes from the line of Arren Cyganovich.

Hi, gentlemen and Corinne. Could you talk a little bit about the portfolio yield? It came down a little bit. I'm assuming it was just from the new senior positions that you put on and maybe talk a little bit about where you think that's going to trend going forward with what you see in the pipeline.

Sure. It's Mike, and I think Corinne can follow up with some of the detail. We lost just a couple basis points, I guess, about 11.9% to 11.6% across the portfolio on a weighted average yield basis from period to period. A lot of that has to do with repayments that happened both in the end of the fourth and really into the first quarter, where we had one high yielding loan specifically repay during that period of time.

There's also some change in, given the rates of some of the new assets that were put on the books, and there's a little bit less amortization of unearned discount, really, in the current period than there was in the fourth quarter of last year.

Okay, that's helpful. And then the credit quality stayed stable, but it looked like a different company came on non-accrual. Can you talk about were there any other companies that went on non-accrual, and how did you resolve the prior company that was on last quarter?

Sure. We took one investment off of non-accrual because it's now structured and paying interest currently. The other investment in the new non-accrual company is a company whose performance has been somewhat weak and has gotten behind in its interest payments and we no longer expect to have those interest payments be fully collectible so we put it on to non-accrual.

Just somewhat by happenstance, the par amount of each of those two securities was approximately the same. So in the aggregate, the dollar number is the same, although one came off of non-accrual is now paying currently, and there's a new loan that is now on non-accrual, both a principal amount of approximately $8 million.

Okay. Thank you.

Our next question comes from the line of Casey Alexander.

Hi, good morning. Can you tell me the percentage of fixed to floating rate in the portfolio? That was the one thing I couldn't find on your presentation.

Well, I think, I guess I'll start by editorializing while we pull up the exact number for you.

Okay.

A good portion of our floating rate interest bearing securities are subject to a Libor floor, some minimum floor amount against which the reference rate is paid. So those are basically exposed to Libor up side but not currently paying based on today's floating rate, because the floor is in effect.

Right.

Okay. And on an aggregate basis, we have a very small portion of our portfolio in the neighborhood of between 5% and 10%, closer to 5% than 10%, that pays floating rate without some kind of a floor protection. So that's the way we kind of think about the effective fixed versus floating.

And of the remainder of investments that are -- so the other 90% to 95% of non-equity investments that pay based on a floating rate, those only have some up side, and that amounts to another approximately 35% of the total debt portfolio.

Okay.

It's also disclosed in the Q if you're looking for it under our MD&A.

All right, great. Thank you.

Again, if you would like to ask a question, that's star 1. Our next question comes from Jonathan Bock.

Yes. Thank you, guys, for taking my question. Jim, you mentioned the use of the credit facility is obviously very important as you try to leverage returns. One question, then. If your focus is on the credit facility and use of leverage, why is it necessary to request to issue shares below NAV?

We continue to request the ability to issue shares below NAV to give us some flexibility. You have to do it on an annual basis. It has to be done once a year. It allows us to be in a position, we could go through our credit line during the course of the next six months or nine months and be in a position where we might want to raise equity.

And it gives us the ability to -- and I will also point us that we never have utilized that. It gives us the flexibility to issue stock in and around an asset value. That's really the way we think about it.

We wouldn't issue equity at a steep discount to that asset value. But we may be in a position on any given day where we want to issue equity and it's 102% of that asset value. It just gives us the flexibility to go forward with an offering. So that's how we think about it.

The other thing I would just add to that is having that capability is a positive when viewed by our credit providers to us. So we believe that it is a good insurance policy, and it assists us in making sure that we do continue to have adequate and more than adequate availability from our banking partners.

Okay. Makes sense. And just jumping back to Arren's question, Mike, what was the investment that went on non-accrual this quarter and what was the investment that came out?

So the investments that swapped on and off were Westward Dough and American SportWorks.

Okay. And then one question, more philosophical, related to dividend and dividend stability. Just looking in the cash flow statement, see that you paid about $17 million in dividends, and obviously this was covered with your $19 million NLI. However, once we start to really back out maybe some of the more less stable or volatile fee items, like the $3 million in fees you mentioned as well as the non-cash items of about $3.7 million, I think we get to more of a stable cash number around $13 million relative to a $17 million dividend.

I understand how gains do feed into this model, but how should we look at the prospect for dividend growth in light of the fact that perhaps from a stable cash flow source, it seemed that maybe dividend coverage is less than optimal relative to the BDC peers?

We spend a lot of time talking about this. In Jim's remarks he mentioned one of the things we pay a lot of attention to, obviously, is our dividend coverage.

There's sort of two different topics within your question that I would address. The first one is I'm not sure where the $3.7 million in non-cash income is coming from. We tend to have mostly cash income generation in our model.

It's just amortization and premium to discount. That's just what we took out of the Q.

Okay, yeah.

0.7 of amortization.

So a part of that relates back to the fee income, which we talk about pretty consistently. And I think while no one portfolio company's fees are a consistent and stable thing, the existence in general of fee income, whether that's fees for new transactions, prepayment penalties, acceleration of amortization on early repayments, these fees tend to be pretty regular in terms of on one or more portfolio companies, they will pretty consistently occur every quarter.

And certainly, over the course of any four quarters, we feel relatively comfortable that there will be a certain rate of fee income generated from the portfolio.

I think as I mentioned in my comments that we had covered our dividend since by a little bit more than a penny since we changed it to $0.26, and when we changed it, we said that it was based on what we thought our income would be.

We have a fair amount of visibility into what's going to happen with our portfolio in terms of repayment, and we think philosophically that turnover in the portfolio is part of the day-to-day business that we operate in, and we think -- we don't think that there's any chance that our business is going to just stop, that we won't have repayments and we won't have new transactions going on in our books. So we feel quite comfortable with the level.

Now, it will, as Mike points out, be higher in one quarter versus the next quarter. But on average, we're quite comfortable with what our dividend level is relative to both base interest and amortization and front end and back end fees.

Got it. And thanks for the detail there. Understand. So I guess the last question is in light of, let's say, what's considered to be a pickup in M&A that obviously give you a chance to deploy capital, how do you feel maybe the second half of 2012 with relation to net portfolio growth, just speaking in broad terms? Do you feel fairly capable, or do you also feel that perhaps repayments might again come back to accelerate over the second half of this year?

Well, they do tend to go hand in hand a little bit because of the higher level of activity. It's sort of the market that we're operating in. But I think the part of the business that's been a little bit slower for the last 12 to 15 months has really been M&A activity in the middle market. And we really do expect that to increase as we move through this year, in part because as we see in our portfolio and as we look at the middle market, quarter after quarter, these companies' earnings and cash flow are improving, and they're in much better shape to be sold today than they were certainly a year ago.

We fully expect that the level of M&A activity will increase as we move through 2012.

Thank you so much.

Our next question comes from (inaudible).

Hi there. Thank you for taking my call. I just wanted to, I guess, follow up on the pipeline question from before. Last quarter, you mentioned that you expected another, you know, a quarter of flat growth. Was there anything that happened towards the end of the quarter that [canalized] new investments or encouraged maybe more growth than you anticipated at the beginning of the quarter?

Sure. I think last quarter's call we mentioned we expected to be essentially flat. Two things really affected that, the positive approximately $30 million of investment relative to our flat expectation.

One is that one transaction that we expected to close in the first or second week of April closed -- for a new investment closed on an accelerated time frame and actually closed on March 31.

The second is that a transaction where we expected repayment in the last three or four -- third or fourth week of March, the repayment actually took a little bit longer and it happened in the beginning of this quarter that we're in now, the second quarter. And when you add up the lack of the repayment, which was between $15 million and $20 million, and when you add in the accelerated new investment, which was approximately $10 million, that gets you to approximately $30 million, which was our net investment, new investments net of repayments for the first quarter.

I see, okay. That makes perfect sense. Also wanted to talk about, to discuss Westward Dough. You mentioned that it was restructured. Can you talk a little bit about that restructuring and maybe what sort of -- maybe what set amounts went into some sort of equity investment and also do you expect any sort of restructuring to occur from American SportWorks or Wastequip as well?

The back end of your question, I think, faded out a little bit. We couldn't hear it. But I think you wanted to hear about the Westward Dough restructuring?

That's correct, and if there's any sort of similar restructurings in the works for American SportWorks or Wastequip.

Sure. Let's do Westward Dough first. The first thing I would say is that with Westward Dough, we restructured -- we had two different loans in Westward Dough before. We turned one of those loans into a higher priority loan, and we restructured the second piece into more of a junior security, and it's sort of a cash sweeping security with equity interests and continuing interests in the business.

And importantly, what that did is it improved the sort of cash flow of the company in terms of servicing the loan piece of our investment, and it created a more patient capital structure where we are, on the margin, more likely to realize more of a return on our equity investment because the capital structure has become more patient.

So in the aggregate, and I think this is sort of maybe the most important take-away, in the aggregate, the fair market value of the securities prior to the restructuring and the fair market value of the securities after the restructuring are pretty close in terms of total dollars. Just certain dollars of those values shifted more to the senior loan, and there's certainly more risk but also more return opportunity in the newly structured equity security. So that's the Westward Dough story.

With respect to this quarter, it's fair to say that we expect but it's certainly not in our control, some restructuring transaction for the balance sheet of Big Dumpster/Waistquip. And with respect to Big Dumpster and Waistquip, again with respect to the fair market value of those securities, our current carrying fair market value all those securities together is awfully close to zero. So there certainly isn't very much risk in any restructuring to us. If anything, there may be some slight up side. And while, again, while we're not in control of that, it's likely to happen during this quarter.

Got it. Thank you. That's very helpful.

And you asked about SportWorks also, and I don't think there will be a restructuring in this quarter. We are currently examining all of our options with that particular [trans] company.

Great. Thank you for the detail.

At this time, if you would like to ask a question, simply press star 1. Again, that's star 1 for questions.

Well, if there are no questions, I'd like to thank you all for participating. And if you have further questions, we're here and available to answer them for you. So thank you very much.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.